Ratings Recap: Sirius, Sunderland Marine, Flagstone Re, Atradius, AmerInst

October 9, 2013

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a” of Sweden’s Sirius International Insurance Corporation (publ) and the ICR of “bbb” of its upstream intermediate holding company, Bermuda-based Sirius International Group Ltd. Best has also affirmed the debt ratings of Sirius Group. The outlook for all ratings remains stable. The ratings “reflect Sirius’ strong risk-adjusted capitalization, robust earnings and sound risk management,” said Best; adding that it “expects Sirius’ consolidated risk-adjusted capitalization to remain strong, supported by stable retained earnings and enhanced by its safety reserve, which amounted to SEK 9.6 billion ($1.409 billion) at year-end 2012. Given the benign loss environment during the first half of the year, and assuming normal catastrophe activity for the remainder of 2013, technical earnings are likely to exceed that of the prior year (2012: SEK 511 million [USD 79 million]).” As partial offsetting factors Best cited “the historical volatility in overall operating performance and ongoing adverse reserve developments in relation to asbestos and environmental exposure at Sirius’ wholly owned US subsidiary, Sirius America Insurance Company.” In conclusion Best said: “Upward rating movements are unlikely at present. Downward rating pressures could occur if there were a material decline in Sirius’ risk-adjusted capitalization and/or a prolonged deterioration in its operating earnings.” Best also noted that it has affirmed the FSR of ‘A’ (Excellent) and the ICR of “a” of Sirius America Insurance Company. Best summarized the ratings affected as follows:
The following debt ratings have been affirmed:
Sirius International Group Ltd.—
— “bbb” on $400 million senior unsecured notes, due 2017
— “bb+” on $250 million non-cumulative perpetual preference shares

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of UK-based Sunderland Marine Mutual Insurance Company Limited (SMMI) with a negative outlook for both ratings. Best said the “affirmation of the ratings reflects SMMI’s improving risk-adjusted capitalization and strong business profile in its specialist markets. Following an unusual loss experience in the marine hull account in 2011, the company’s risk-adjusted capitalization deteriorated substantially.” Best explained, however that “steps were taken during 2012 to reduce the impact of such a series of losses in the future and to enhance SMMI’s capital position, including improved risk selection, the purchase of additional reinsurance cover for its protection and indemnity account and a reduction in the company’s cross class annual aggregate deductible. By year-end 2012, risk-adjusted capitalization had improved to a level more supportive of the ratings.”
Best said it “expects risk-adjusted capitalization to strengthen further in 2013.” However, best explained that the “negative outlook has been maintained to reflect the uncertainty as to whether the actions taken are sufficient to improve SMMI’s long-term operating performance, although a good operating profit is forecast for 2013, supported by a solid investment return. While SMMI’s business line diversification is limited, it has a strong business profile in its specialist marine and aquaculture markets, where its underwriting expertise and risk management capabilities support high client retention. Business is underwritten in a broad range of territories, which include North America, the United Kingdom, Continental Europe and Australasia.” Best added that it would “continue to monitor SMMI’s operating performance and risk-adjusted capitalization, given the measures that have been put in place by the company to protect its capital position. Unexpected weak operating performance or deterioration in SMMI’s risk-adjusted capitalization over the next 12-24 months could lead to negative rating actions. However, SMMI and the North of England P&I Association Limited, with which SMMI formed a strategic alliance in late 2011 and which has provided quota share reinsurance since 2012, announced in August 2013 that they are in talks that could lead to a merger. This merger could lead to positive pressure on SMMI’s ratings.”

A.M. Best Co. has upgraded the financial strength rating to ‘A’ (Excellent) from ‘A-‘ (Excellent) and the issuer credit rating to “a” from “a-” of Flagstone Reassurance Suisse S.A. (FRS), both with stable outlooks. Best said the “rating upgrades reflect FRS’ excellent level of risk-based capitalization, conservative business plan, stringent underwriting guidelines, excellent enterprise risk management program, as well as the commitment and experience of the management team at its parent, Validus Holdings, Ltd.” Best added that “from a strategic standpoint, FRS will allow Validus to enhance and expand its business profile by providing a global underwriting platform for the anticipated writings of Validus’ agricultural and Latin American business portfolios and other property treaty reinsurance. This structure will allow the company to continue to develop and maintain strong relationships with brokers and clients. Underwriting and risk management will be aligned with the wider Validus group through FRS’ use of the Validus Capital Allocation and Pricing System, a proprietary computer-based system for pricing and exposure management. As part of this new business plan, which is subject to final regulatory approval, there will be a reinsurance quota share between FRS and Talbot Underwriting Ltd.” In addition Best noted that “FRS also is planning to write a small percentage of the existing Validus Reinsurance Ltd. U.S. and European property treaty accounts on its balance sheet. FRS is capitalized to a level that is in line with its current business plan. Rating factors that could lead to FRS’ ratings being upgraded or an outlook revised to positive include long-term consistently strong operating performance relative to its peers, maintaining strong risk-adjusted capital levels and executing its business plan. Rating factors that could lead to the company’s ratings being downgraded or an outlook revised to negative include not adhering to or executing its business plan as presented to A.M. Best, outsized catastrophe or investment losses relative to its peer group, unfavorable operating performance or a material decline in its risk-adjusted capital.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength ratings (FSR) of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a” of the key operating subsidiaries of Netherlands-based Atradius N.V., Atradius Credit Insurance N.V. (ACI), Compañía Española de Seguros y Reaseguros de Crédito y Caución S.A. (CyC), Atradius Reinsurance Limited (ARe), which is based in Ireland, and U.S.-based Atradius Trade Credit Insurance, Inc.(ATCI). Best has also affirmed the debt rating of “bbb+” on the €120 million [$162.25 million] fixed to floating rate step-up guaranteed subordinated bonds, issued by Atradius Finance, B.V., and unconditionally and irrevocably guaranteed by Atradius and ACI. The outlook for all of the ratings is stable. Best said the ratings reflect its “expectation that risk-adjusted capitalization will continue to be maintained at an excellent level, both at the consolidated and individual subsidiary levels. Atradius’ risk-adjusted capitalization is likely to remain supported by the group’s robust earnings generation and cautious approach to growth, given the uncertain economic conditions within its core European markets.” In addition Best said the ratings “also consider the strategic importance of ACI, CyC, ARe and ATCI, through their presence in key markets around the world. Additionally, ACI remains the main revenue and earnings contributor to Atradius, while ARe remains of strategic importance as the group’s licensed reinsurer of third-party and intra-group business.” Best noted that the “benefit of corrective actions taken by Atradius to sustain its overall good technical results continues to materialize. As at half-year 2013, the Spanish and Portuguese account produced a combined ratio of 87 percent (half-year 2012: 109 percent) on the back of the protracted economic downturn.” Best said that although it “recognizes the potential downside risk associated with Atradius’ operation in these markets (representing 25 percent of consolidated gross written premium at half-year 2013).” Best also said it believes that “the group has implemented measures that will continue to support positive performance. The ratings of ACI, CyC, ARe and ATCI incorporate a view of the relationship with their ultimate majority shareholder, Grupo Catalana Occidente S.A. (GCO) (Spain), whose key subsidiaries outside the Atradius group maintain an FSR of ‘A-‘ (Excellent) and an ICR of “a-“. GCO is a leading non-operating insurance holding group within the local Spanish market.” Best said it “believes that the Atradius group of companies maintains a high degree of financial and operational independence from the other operations of GCO. GCO’s consolidated risk-adjusted capitalization is considered to be maintained at a strong level.” In conclusion Best said: “Positive rating actions are unlikely in the medium term. Negative rating actions could occur if risk-adjusted capitalization was considered to be unsupportive of the current rating levels, both at the consolidated and stand-alone entity levels. A sustained decline in operating performance, particularly in relation to Atradius’ Spanish and Portuguese portfolio, could also result in negative pressure on the ratings of Atradius. Furthermore, a change in Best’s perception regarding the fungibility of capital across the Atradius group of companies or in the perceived level of independence from GCO would likely result in negative rating actions.”

A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating (ICR) of “a-” of AmerInst Insurance Company Ltd. Best has also revised the outlook to negative from stable and affirmed the ICR of “bbb-” of AmerInst’s holding company, AmerInst Insurance Group, Ltd. “The ICR for AmerInst Insurance is strictly based on its methodology,” Best explained. Both companies are domiciled in Hamilton, Bermuda. Best said the “ratings reflect AmerInst’s strong capitalization, experienced management team and niche expertise in providing professional liability coverage. AmerInst’s long-term contractual relationship with Crum and Forster Insurance Company, its partner in underwriting, marketing and claims also contributes positively to the ratings.” As partial offsetting factors Best cited “AmerInst’s narrow spread of underwriting risk, as well as its inability to meet its new revised business plan, which was forecasted over the past three years.” Best explained that the negative outlook for the ratings “is due to the underperformance of the organization’s new revised business plan,” as Best anticipates this continued underperformance will put pressure on its “expectations for the organization’s current ratings. AmerInst intends to continue under its new revised business plan to employ a conservative reserving methodology under which it has historically booked to a higher loss ratio than that of its primary carrier.” Best did indicate that AmerInst has met its “higher capitalization requirements, which mandate a more conservative level of risk-based capital for its new revised business plan. Although capital is supportive of its new revised business plan, AmerInst continues to generate both underwriting and net losses as well as demonstrate an under performance in its premiums written. In conclusion Best said: “Positive rating actions may result from AmerInst executing its new revised business plan over the long term, along with a consistent positive operating performance with minimal volatility. Negative rating actions may result from the company having larger than expected losses, a reduction in its capital and/or continued negative deviation from its business plan.”

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